Small realtors pin hopes on Sebi's new norms for funds

NEW DELHI: Small builders that have been facing funds crunch for many months are banking on capital market regulator Sebi's new Alternative Investment Funds regulations to ease access to money.

Over the past several months, banks have cut down on lending to smaller real estate players, while home sales have slowed down, forcing them to stall many projects. Unlike big builders, these companies haven't been able to woo foreign private equity funds because most of their projects are not FDI-compliant.

"With the new regulation, however,large funds will be raised from domestic HNIs, which is ideal for small and medium developers who offer good opportunity for these domestic funds," says Sanjay Dutt, executive managing director, South Asia at property advisory firm Cushman & Wakefield .

The new Sebi regulation regulates the area of raising domestic capital from HNIs, be it for venture funds or for real estate private equity funds. The regulation mandates that the minimum investment size has to be . 1 crore from an HNI investor, and promoters of the fund will now have to contribute at least 2.5% of the corpus or . 5 crore, whichever is higher.

It also says that any conflict of interest on part of the promoter has to be disclosed. "This will bring more transparency into this segment and will allow it to grow in a structured way like it has happened globally . Funds will be more credible, giving HNI investors more confidence to invest," says Anckur Srivasttava, chairman of Gurgaon-based GenReal Property Advisers.

Till now, many funds raised money from smaller retail investors with sums as low as Rs 5 lakh. This new regulation pushed these retail investors out as the regulator feels these smaller investors might not be able to fully understand the risks associated with investing in this asset class.

"The new regulation may shrink the investor base drastically in the beginning and will make it difficult for smaller funds to raise capital. But the shake out will bring in more confidence," says Amit Goenka, national director (capital transactions) at property consultancy Knight Frank India.

HNI investors have been investing in real estate private equity funds because of the promise of high returns but some have not ventured yet as they are not comfortable with the lack of regulation.

"Now, investors will certainly feel more confident and in future more of them might want to invest in such funds given the better level of investor protection," says Richa Karpe, director-investments at multi-family office Altamount Capital.

But she also points out that since most real estate private equity funds are yet to show returns, the appetite for investing in this segment might depend on returns generated by funds. At present, based on the exits that have happened , private equity funds in the real estate space have shown returns between 14-20 %.

"If investors see good returns , they will come back," she says. The newer, more organized domestic funds with larger corpus' will also help older funds with their exits, says Srivasttava . A number of private equity funds that were set up between 2006 and 2007, both domestic and foreign, have reached the end of their tenure and are looking to exit many investments.

For the fund industry, it will bring in more governance and investor protection as only those investors who understand the risks associated with investing in private equity funds will participate.

"It is in the interest of the industry. While in the short term, it might mean some institutions who have focused on retail investors might suffer, in the medium to long term, we should see more capital becoming available, especially for smaller real estate players," says Amit Bhagat, CEO of ASK Property Investment Advisors.